Inventory Management Motives

Principle & Practice of Management

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Inventory Management Motives

Inventory Management Motives

Managing inventories involve lack of funds and inventory holding costs. Maintenance of inventory is expensive, then why should firms hold inventories? There are three general Inventory Management Motives for holding inventories:
1. Transaction Inventory Management Motives : Transaction motive includes the production of goods and sale of goods. Transaction motive facilitates uninterrupted production and delivery of an order at a given time (right time).
2. Precautionary Inventory Management Motives : This motive necessitates the holding of inventories for unexpected changes in demand and supply factors.
3. Speculative Inventory Management Motives : This compels to hold some inventories to take the advantage of changes in prices and getting quantity discounts.

Need for Balanced Investment in Inventory

Inventory Management Motives

Management of optimum level of inventory investment is the prime objective of inventory management. Inadequate or excess investment in inventories is not healthy by for any firm. In other words, a firm should avoid inadequately (under) investment or excess (over) investment in inventory. The investment in inventories should be sufficient. The optimum level of investment in inventories lies between excess investment and inadequate investment.
1. Dangers of Excessive (over) Investment in Inventory: The following are the dangers of excessive investment in inventory:
(a) The excessive level of inventories consumes funds of the company, they cannot be used for any purpose since they have locked in inventory, and they involve opportunity costs.
(b) The excessive investment in inventory increases carrying a cost, that include the cost of storage, capital cost (interest on capital in inventories, insurance, handling, recording, inspection, obsolescence cost, and taxes. this cost will reduce the firm’s profits).
(c) Carrying excessive inventory over a long period leads to the loss of liquidity. It may not be possible to sell the inventories in time without loss.
(d) Another danger of carrying excessive inventory is the physical deterioration of inventories while in storage. In the case of certain goods or raw materials deterioration occurs with the passage of time or it may be due to mishandling and improper storage facilities.
(e) Excess purchases or storage leads to theft, waste and mishandling of inventories.